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Vol. 19, No. 34 Week of August 24, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

AK-WA Connection 2014: New investment fuels oil patch optimism

Parnell administration leads efforts to rejuvenate oil production in Alaska, spur development of liquefied natural gas project

Rose Ragsdale

Alaska-Washington Connection

A resurgence in oil and gas activity in Alaska in 2014 has given businesses active in the Alaska-Washington trade new prospects for increased revenue and new hope for future prosperity.

Observers give much of the credit the sector’s recent hustle and bustle to the impact of Senate Bill 21, also known as MAPA, the More Alaska Production Act. This legislation, signed into law in 2013 by Gov. Sean Parnell, replaced ACES, Alaska’s Clear and Equitable Share, eliminating progressivity among other changes, in an effort to attract industry investment and stimulate crude production and oil flow through the trans-Alaska oil pipeline.

“It seems that Alaska’s economy is perking up a little bit, and I’m hoping people realize it’s the result of optimism in the oil patch,” said Aves Thompson, executive director of the Alaska Trucking Association.

A potential cloud on the horizon, however, is a veto referendum on SB 21 scheduled for a vote in Alaska’s primary election Aug. 19 that threatened to overturn the new law even as the business community settled in to reap the benefits of its enactment.

Recognizing the opportunities at stake, Thompson said many Alaska businesses conducted internal campaigns this spring and summer urging employees and their families to support retaining SB 21.

One thing both sides of the referendum battle agree on is more oil and gas production will be good for Alaska.

Scott Goldsmith, professor emeritus of economics at University of Alaska Anchorage Institute of Social and Economic Research, said, “Investments that draw new outside money into the oil patch could create long-lasting jobs and increase consumer purchasing power.”

Goldsmith, who recently conducted an independent study on the issue, said $4 billion in new spending in the oil patch, for example, could add an average of 5,000 public and private sector jobs per year over 20 years to the economy, generating more than $300 million of additional wages and salaries annually.

Mining and oil and gas have been strong sources of new jobs in Alaska since 2010, and this growth was forecast to continue in 2014. Though not quite at their recent peaks, oil and mineral prices have remained relatively high, which will also encourage development.

Oil patch optimism

A McDowell Group study for 2013 included 16 primary oil and gas production companies, pipelines and refineries in Alaska: Alyeska Pipeline Service Co., Apache Corp., BP Exploration (Alaska) Inc., Chevron, ConocoPhillips Alaska Inc., Eni Petroleum, ExxonMobil Production Co., Flint Hills Resources Alaska, Hilcorp, Petro Star Inc., Pioneer Natural Resources Alaska Inc., Repsol E&P USA Inc., Shell Exploration and Production Co., Statoil, Tesoro Alaska Co. and XTO Energy Inc.

These companies employed 5,335 workers in 2013, 4,700 of whom were Alaska residents who earned $780 million in wages.

The overall industry generated direct, indirect and induced employment and wages of 51,000 jobs and $3.45 billion in the state’s private sector, excluding nonresident oil and gas industry workers and their wages.

Further, Alaskans have the lowest tax burden of all 50 states, due to the state’s heavy dependence on revenue from oil to balance the state’s budget. Oil revenue provides 90 percent of Alaska’s discretionary funds, which are used to compensate teachers, some law enforcement officers, roads and snowplows, health care, and state social workers.

Almost half of construction spend in state

ISER said oil and gas companies will spend an estimated $4.255 billion in the state in 2014, almost half of the $9.1 billion in total construction spending the researchers expect this year.

“The growth is being driven by the continuing high price of oil, the increase in the cost of inputs to all phases of oil and gas operations, the growing need to maintain the aging infrastructure and facilities on the North Slope and in Cook Inlet, and perhaps most importantly, by the climate of optimism created by passage of the new production tax on oil and gas that went into effect at the start of 2014,” Goldsmith, Mary Killorin and Linda Leask wrote in a forecast released in February.

ConocoPhillips, for example, has announced $2 billion in new projects since the Legislature passed the oil tax reform bill in 2013. The company expects to add 40,000 barrels per day of new North Slope oil production by 2017.

The new production would boost throughput in the trans-Alaska oil pipeline, which is operating at about 520,000 barrels per day, less than one-fourth of the crude it shipped at peak production of 2.1 million bpd in 1988.

Alaska oil production has been decreasing at an average 6 percent annually but new activity on the Slope could slash that decline to about 1.5 percent this year and zero next year, if the current projections are realized.

BP Exploration (Alaska) has announced $76 million in work for three turnarounds planned for Prudhoe Bay this summer, including a module for Gathering Center 2 completed at NANA’s Big Lake facility in April.

In addition to scheduled turnaround work, BP is also doing a $290 million compressor replacement project at the three Flow Stations on the eastern area of Prudhoe Bay, with the project skids also being constructed at the NANA Big Lake Facility.

BP said more than 15 Alaska-based companies will provide services for the projects, including Arctic Slope Regional Corp. and Carlile Transportation Systems.

In addition to new industry investment, Alaska has taken steps to jumpstart development of a pipeline and LNG project to begin marketing the 35 trillion cubic feet of natural gas currently stranded on the North Slope.

Producers, transportation companies and government are working together to bring the gas to the Fairbanks area for business and residential consumption and potentially to ship LNG to markets outside Alaska.

LNG project advances

Citing significant progress on an Alaska gas pipeline that gets Alaska’s natural gas to Alaskans and markets beyond, Gov. Sean Parnell July 2 welcomed news that a formal commercial agreement has been signed between the Alaska Gasline Development Corp., BP, ExxonMobil, ConocoPhillips and TransCanada to advance the Alaska LNG Project. “Environmental and pipeline engineering fieldwork has officially begun,” Parnell said. “I am pleased all parties continue to make progress on building an Alaska gasline project that will create thousands of Alaska jobs and fuel Alaska homes and businesses. This milestone marks the historic progress we have made on a gasline. Our way forward will continue to be on Alaska’s terms and in Alaskans’ interests.”

The Alaska LNG Project has fully entered the pre-FEED, pre-front end engineering and design phase - a milestone no previous North Slope natural gas project has achieved, the governor’s office said.

During the Pre-FEED phase, the producer parties will spend hundreds of millions of dollars on design and engineering of the project. In the coming weeks, the project will begin to work to secure an export license with the U.S. Department of Energy and continue permitting work with the Federal Energy Regulatory Commission. Each producer party, in addition to the state, will begin to engage the liquefied natural gas sales market during this phase.

Cook Inlet investment

In Cook Inlet, where major fields have been in decline for decades, independents have moved in, revisiting and reworking oil and gas projects across the basin.

One example is Miller Energy Resources of Knoxville, Tennessee, which made its entry into the Alaska oil and gas arena in December 2009 through Cook Inlet Energy, which took over an assortment of shut-in assets acquired out of the bankruptcy of California-based Pacific Energy Resources Ltd.

Since that time, Cook Inlet Energy has worked to restore production and to drill new wells.

Miller Energy has petroleum production of at least 6,000 barrels of oil equivalent per day, with about 4,000 boe per day from Cook Inlet, about 600 bpd net to Miller from the Badami oil field on the North Slope and a dab in Tennessee.

Miller Energy became involved at Badami in May when it entered into a binding deal to buy Savant Alaska LLC, the Badami operator, through which it will gain a roughly 67.5 percent operating interest in the Badami oil field on the North Slope, which has some 17,200 gross acres with eight producing wells.

Miller’s major Alaska producing assets are in Cook Inlet and include the West McArthur River oil field on the west side, the offshore Redoubt unit and the Osprey platform and the North Fork gas field on the southern Kenai Peninsula.

Oil field support activity

When Alaska’s oil companies thrive, the state’s support industries also do well. Companies such as Arctic Wire and Rope Supply Inc., Pacific Pile & Marine LP, MagTec Alaska, Cook Inlet Tug & Barge, NC Machinery/Harnish Group, Opti Staffing Group and UIC Professional Services should see increases in their customer orders as well.

UMIAQ, a unit of UIC Professional Services, which employs about 200 professionals who offer a wide variety of services on the North Slope, including complete logistical support for exploration drilling field operations and facility development, is augmented with marine and logistic organizations within UIC. The company maintains strategic support bases in Alaska, including at Umiat and Point Barrow, plus a full range of remote camp services and staff.

MagTec Alaska is one oil field support company that provides equipment rentals and associated services on the North Slope and in Cook Inlet. Beyond the traditional oil field equipment rentals such as portable heaters, generators, light plants, man lifts, and zoom booms, MagTec provides a wide range of specialized portable buildings and fit-for-purpose job site buildings and equipment as well as full-service project support with personnel capable of servicing and maintaining the equipment onsite.

Growth for MagTec has taken a significant upswing as business development and operations on the North Slope increased. Supporting projects for Eni Petroleum at Oliktok Point and other prominent locations, MagTec has built a presence in Deadhorse that includes a new shop on a 6.5-acre pad, a 50-man single-status camp, 12 full-time rotating positions, and a fleet of more than 200 new heavy duty Ford pickup trucks.

While a large percentage of operations happen on the North Slope, MagTec has a significant presence on the Kenai Peninsula where it also supports Cook Inlet drilling operations.

Some companies are also encountering significant growth opportunities in the oil patch. For example Arctic Slope Regional Corp. in May reported its acquisition of Little Red Services Inc., a provider of “hot oil” and other well services on the North Slope for more than 30 years.

“It’s an exciting day for ASRC,” ASRC President and CEO Rex A. Rock Sr. said. “I believe the nature of LRS’ services positions the company for long-term growth as North Slope producers seek to increase production, as a result of oil tax reform.”

“I speak for LRS employees when I say we are excited to join the ASRC family of companies,” added Doug Smith, LRS president and CEO. “ASRC and LRS have a shared commitment to the Alaska oil & gas industry, and I believe the combination of oil tax reform and the financial support of ASRC will allow LRS to expand and improve the services we have provided to North Slope producers for more than three decades.”

As a wholly owned subsidiary of ASRC, LRS will be operated separately from ASRC Energy Services Inc. This operating structure will help to protect LRS’ brand and allows the management teams at LRS and AES to focus on what they do best, the companies said.

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